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How to Correct Significantly Overfunded DB Plan With One Employee

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Client (74) is a sole proprietor in a business that does music publishing and talent management. He is the only current employee and participant of his DB plan. Through good stock investments, he over funded his DB plan. Prior actuary sold business and didn't alert him to the over funding issue. New actuary informed that due to the over funding he cannot make a tax-deductible contribution this year. Plan is now valued at $4.4mm. Client is still earning approximately $400k a year in royalties and management fees. I am trying to formulate a plan for the client and would appreciate your help/guidance as this is a case of first impression for me. Here is what I have come up with thus far.

  • Immediately make Required Minimum Distribution for 2019
  • Increase plan benefits to the maximum allowable amounts under Section 415 of the Internal Revenue Code ("IRC”). What are some ways this can be done?
  • Freeze DB plan growth by selling stocks within the plan and investing in short and medium duration Commercial Paper. 
  • Immediately transfer via a direct rollover the maximum lump sum amount allowable (how much is this?) to an IRA
  • consider employing wife and/or daughters since, as participants, they will accrue plan benefits under the plan, reducing the overfunding. Follow all compliance rules and be aware of traps for the unwary, such as ?  Wife already does some work for the business. She just doesn't get compensated, yet.
  • Other ideas?

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We have client in kind of a similar situation - benefit is 415 max but plan is over funded on a lump sum basis because the sole participant continues to work into his 70's (and is taking RMDs). However, the plan is slightly under funded I believe on the basis of a 100% J&S because his wife is significantly younger, so he can continue deductible contributions.

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Plan is way over 1M overfunded. Adding his spouse with reasonable compensation (to be discussed with the CPA and the plan actuary) may solve this problem in the long run. Also need to discuss with the CPA and plan actuary if the spouse's past years of service can be included even if no compensation. If assets continue to grow, not much can be done to eliminate the overfunding.

If they want any deduction for 2019, have them set up a 401k/PS plan for 2019 so that they can get some deduction. No more contributions into the DB plan.

Sell the plan's assets??

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One more addition, may buy life insurance under the plan, pay the premium from the plan assets and the face amount may cover the losses attributable to the over funding but needs to be planned carefully especially with the cash value that will be generated thru the policy. with this approach, the plan needs top continue until the policy beneficiary passes or assets go down to a reasonable level. Sometimes, it may work.

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